As the price of oil soars and China's insatiable appetite for growth sparks a race to sign energy contracts, valley start-ups are realizing there could be real profit in alternative energy. The challenge to make technical breakthroughs -- and good money -- is drawing eager scientists. And all this is turning the heads of leading venture capitalists.

"That's what America wants right now," explained T.J. Rodgers, chief executive of San Jose's Cypress Semiconductor, referring to the need for new, cheap power. He has invested time and big money in solar and fuel-cell companies. "It's strictly a capitalist enterprise," he said.

Venture capital investments in clean-energy technologies alone last year represented 2.4 percent of total venture investing in the United States, still small but up from 0.8 percent in 1999, according to research group Clean Edge. Even the valley's powerhouse venture capital firm, Kleiner Perkins Caufield & Byers, acknowledged it's seeking energy deals for the first time in its three-decade history: "That's a left turn, a new initiative for Kleiner," partner John Doerr said at a San Francisco conference last month.

Silicon Valley brings technology know-how to energy. The fine-tuned precision of the semiconductor manufacturing process, for example, is the secret sauce behind SunPower's production of solar cells. Similarly, local high-tech instrument manufacturers such as Hewlett-Packard and Varian were precursors to Genencor's ability to experiment with ethanol.

It's not merely new ideas driving the change -- it's policy, too. Last month, a valley non-profit, Palo Alto's William and Flora Hewlett Foundation, sponsored a major report by a national bipartisan group on "Ending the Energy Stalemate," recommended investments in alternative energy and forgotten industries such as nuclear power, and grabbed the attention of lawmakers.

Further, the valley's big technology companies have the clout to bring about big change. For example, Santa Clara chip giant Intel recently created new standards that require power suppliers to become more efficient, as a condition of using devices carrying Intel chips. That has pushed an array of new local companies to find ways to save power or make chips more energy-efficient.

Of course, there are skeptics. Many valley venture firms say energy offers few home-run opportunities. Others are interested but groan that new ideas are still few and far between. Bill Green, venture capitalist with Vantage Point Venture Partners, was impressed, at an October San Francisco solar conference, by how serious the industry had become.

"There was a conspicuous absence of pony-tailed attendees and granola on the floor," he said. But still, cutting-edge companies "seem to be the exceptions rather than the rule," he said.

Even advocates differ. Environmentalist and entrepreneur Bob Epstein sees ethanol as an answer but doubts the feasibility of many fuel-cell projects. Businessman Rodgers thinks fuel-cell companies will be ready within five years but dismisses biofuel alternatives such as ethanol as still in the research phase.

Still, everyone agrees that the time is ripe for the right companies and technology.

Rodgers placed his bet on solar in 2001, after someone suggested putting solar panels on his company's new San Jose building. He did the math, and it worked out. He would pay off the cost in seven years, then enjoy free energy for the 25- to 30-year life of the cells. And if the cost of energy were to go up, the economics would be even better.

Then, in 2003, he bumped into a former Stanford University classmate, Dick Swanson, who said he had founded SunPower and was making the most efficient solar cells in the world. That December, when Swanson told Rodgers the economic downturn was forcing him to lay off half his staff and consider shutting down, Rodgers wrote him a $750,000 check.

Rodgers then got Cypress' board to approve more investments. By next month, Cypress will have pumped $200 million into SunPower.

Its first products, just out, are being well-received. SunPower is now in full ramp-up mode, and word is it could aim for an initial public offering within two years. Other solar companies with futuristic thin-film or foil solar-cell technologies -- including Miasole, Nanosolar and Nanosys -- say they'll hit the market sometime soon, with even better products.

Rodgers also has invested in the fuel-cell arena, where technology is much younger and manufacturing processes are only now being developed.

One company with buzz is the top-secret Ion America, in which Kleiner Perkins has invested.

Ion America makes what is called a "solid oxide" fuel cell technology, which the company believes can soon compete with grid-delivered electric power.

Several snippets about the company have leaked out. One document showed that the Navy began testing the technology, which is said to provide oxygen for a submarine crew to breathe as well as power for submarine propulsion.

How did Rodgers find it? Silicon Valley's energy community is fairly tight knit, Rodgers said, and Kleiner Perkins was looking for an experienced businessman to join the board. The board even has a Washington lobbyist, Andrew Lundquist, who previously was the director of Vice President Dick Cheney's controversial energy-policy task force.

Lately, there's also been interest brewing in biofuels.

Palo Alto's Genencor has worked feverishly on the problem of lowering the cost of ethanol production. Ethanol, which can be produced from plants and blended efficiently into gasoline, burns clean. But it's expensive. Experts, inside and out, say Genencor's breakthroughs in ethanol production could hit competitive price points -- of 5 to 10 cents a gallon -- within three to five years.

Biofuels are where Silicon Valley may contribute the most, says Epstein, who founded Environmental Entrepreneurs, a local group focused on clean technology.

"If Silicon Valley, through bioengineering, solves the problem of how to efficiently convert energy from plant material -- if they crack the code on that -- thaat's the biggest transformation I could imagine," he said.

Such a breakthrough would leave the United States less reliant on oil imports and transform agricultural economies in poorer countries, he said. It also would bring big money to Genencor by undercutting the more costly biofuel technologies of incumbents such as Monsanto.

"It's a model that has worked again and again," says entrepreneur Sunil Paul, founder of anti-spam company BrightMail, who has started a forum with other entrepreneurs called the "Power Lunch" in search of alternative energy ideas. "Take new technologies and marry them with the right management teams and financing."

Still others are turning to more traditional power sources, for example, nuclear or coal, but hope to make them cleaner and more efficient through technology advances.

Take San Francisco venture capitalist Lip-bu Tan of Walden International, who tired of the fumes and smoke he found during his trips to cities like Beijing.

Fearing that China's ever-growing thirst for cheap power would soon bring it in conflict with the United States, Tan has taken a sabbatical to study ways to invest in China's power grid. He's looking to back companies that help supply more efficient components, electronics, software and monitoring technologies.

Tan was trained as a nuclear physicist, but abandoned hopes of getting a job in the field because the United States was turning away from nuclear power at the time. Now he's picking up his college books again and hoping to make a return.

"Nuclear is one of the energy forms to be invested in," he said, smiling about the irony of returning to the industry where he started.

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